In which ways can you pay back private money lender?

Investor · Flushing, NY · Member since 2013 · 32 posts · 3 votes

Hi Everyone,

I am looking for some possible alternatives on paying back a private money lender. If I was to borrow lets say 100K for a down payment on a property I am currently speculating on. My current strategy would be to offer an 8-12% on his investment for the year. However Id also like to borrow against the equity I would have on the home to repay back the full amount of the loan so that I only owe the bank now. Is this a possible strategy?

Thank you

0 Reply

39 views

Most Popular Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

@Nick Zias to clarify all the post

NO you cannot borrow money from a friend and call that your equity. when you get a loan. you in essence have two loans.. lender won't allow it.

YES you should in this instance create a LLC with the 100K as a Member.. and there capital contribution is 100k.. NOT a Loan to the LLC but true capital.. if they own less than 20% of the LLC usually they don't have to PG. you CAN have uneven distributions in an LLC so no matter what % they own they still have a capital account to cover their cash.. the capital accounts would look like this

1. your friend 100K

2. you 100 dollars..

property is sold it makes 200k first 100k goes to your friend.. next 100 dollars goes to you.. the 99,900 can be split any way you guys agree to in the operating agreement.. this is the luxery of the LLC... you can establish a pref . return plus equity.. only a pref no equity.. what ever you folks agree to.

Podcast Guest on Show #222

JLH Capital Partners51 Review

Website View Page

3 Reply

See this reply in the discussion

24 Replies

Jump to latestLatest

Sort by

Kevin Harrison
Investor · Woodbridge, VA · Member since 2015 · 476 posts · 197 votes
9y
Hard money lenders will typically set their own rates with little to no room for negotiation unless you have developed a relationship with them. You can always and most people typically do use HM for the acquisition and then get a bank loan at a better rate later to pay off the HM lender.
1 Reply
Nick Zias
OP
Investor · Flushing, NY · Member since 2013 · 32 posts · 3 votes
9y
I am not using a hard money lender. Its a private money investor whom I have a personal/family relationship with. Sorry for the confusion.
0 Reply
Domenic Marchetti
West Warwick, RI · Member since 2016 · 16 posts · 11 votes
9y
A couple of questions:
1) Are you borrowing $100,000 for the down payment on a property and securing conventional funds for the balance of the purchase price?
2) Is it a turn-key property or is rehab needed?
Essentially you need to run some numbers to see how much equity will be in the property after purchase, what your cash flow from the property will support, etc.
I'd do a search of the BP site on "Creative Financing" and see what others have done. You may be able to develop a solution based on some similar situations others have been in.
Best of luck.
2 Reply
Account Closed
Rental Property Investor · Orlando, FL · Member since 2016 · 463 posts · 220 votes
9y
Two thoughts:
1) If you are going with a conventional loan from a bank, you will need to make sure the lender is aware that the down payment is another loan and allows that. Many lenders frown on this or prohibit it altogether.
2) In the first several years of a loan, most of the monthly payment goes towards interest and very little towards paying down principal/building equity. After a year, you will hardly have any equity in the property. Definitely not enough to pay back $100K with 8-12% interest.
1 Reply
Nick Zias
OP
Investor · Flushing, NY · Member since 2013 · 32 posts · 3 votes
9y
Domenic -
1) Yes the 100K is for the down payment and I will secure conventional fund for the balance.
2) Yes the property is turn-key and is profitable already.
3) The current actual cash flow will allow for a 15% return on the initial 100K. However the units are currently underpriced for the surrounding area and will allow as much as 35% return on the initial 100K "if" rents are raised.
Patsy -
The 100K down payment will be the initial equity on the home and 8-12% will be returned through cash flow. I am wondering what is the best way to borrow against the equity I have on the home v.s. the convetntional loan, so that I can pay back my private money investor. I hope that helps.
Regards
0 Reply
Michael Le
Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
9y
Nick, what equity will you have in the property beyond the down payment? Is this a commercial property? If it is and you are able to raise the NOI and get the property refinanced based on the new value then you can cash out and pay the lender back. If it's residential then your equity won't change until you pay down the mortgage and/or the property appreciates.
0 Reply
Nick Zias
OP
Investor · Flushing, NY · Member since 2013 · 32 posts · 3 votes
9y
Michael, I will put a portion of my own money towards the property as well. It is a commercial property. The NOI will increase due to increased rents. The property is also being sold at a discount as compared to other properties in the area.
Regards
0 Reply
Michael Le
Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
9y
So it's being sold at a higher cap than the current market cap rate? And you're calculating this higher cap based on the current NOI and not the potential value add, right?
But as Patsy mentioned, you might have a harder time with a lender providing this loan since you have a non-equity party providing part of the down payment.
0 Reply
Nick Zias
OP
Investor · Flushing, NY · Member since 2013 · 32 posts · 3 votes
9y
It's being sold at a lower market cap rate.
0 Reply
Michael Le
Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
9y
Lower market cap rate means it's more expensive, not cheaper. When you're buying, you want a high market cap rate. So is the rate higher or lower than the market? And is it based on the current, real NOI and not pro forma?
0 Reply
Nick Zias
OP
Investor · Flushing, NY · Member since 2013 · 32 posts · 3 votes
9y
The property is priced lower than the actual value of the property as compared to similar properties in the area. Therefore yes the cap rate is higher than the current market based off of current NOI, not potenital value add. Sorry for the confusion.
0 Reply
Jeff Kehl
Rental Property Investor · Charlottesville, VA · Member since 2012 · 1k+ posts · 726 votes
9y
@Nick Zias It's a bit hard to follow what you're doing here because at times you refer to this as a 'home' and other posts you say it is a commercial property. But generally this is a solid strategy. Buy below market value using a bank loan + a private loan then refinance at a higher appraised value and take out the private loan.
But that strategy usually involves some sort of rehab/repositioning. What are you doing to bring the market value of property up beyond what you paid? If nothing other than you think you made a great buy if I were the appraiser on the refinance I would argue that market price was what you paid. Because after all the definition of market price is what a buyer and seller agree on.
1 Reply
Percy N.
Developer · Philadelphia, PA · Member since 2015 · 2k+ posts · 904 votes
9y
If this is a private lender you know, offer them equity in the LLC. That way the bank will not object. Also have an agreement that allows you to buy back the units at a pre agreed on price within 12-18 months. Check with your CPA and attorney on this approach.
2 Reply
Nick Zias
OP
Investor · Flushing, NY · Member since 2013 · 32 posts · 3 votes
9y
@Jeff Kehl it is a commercial property. Rent can be increased by 14% as it is underpriced. I do agree with what you are saying on market price but the seller is offering the property for signifficantly less than what he can get for it.
@Percy N. That seems like a good strategy that I will look into and possibly discuss with my lender.
0 Reply
Percy N.
Developer · Philadelphia, PA · Member since 2015 · 2k+ posts · 904 votes
9y
@Nick Zias, ask the bank for a non-recourse loan in the name of the LLC. Chances are they will want you to personally guarantee it if it is under say $3million.
If that is the case, get a commercial loan in the name of the LLC. Your partner and you will be members of the LLC. You can bring in other members you already have a relationship with.
Make sure you have a good operating agreement and that you are the manager of the LLC.
0 Reply
Stephanie P.Pro Member
Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
9y
@Nick Zias
There are mortgage products for your situation that don't involve banks. You could get a no income verification, no title seasoning, cash out loan (the rate is above bank financing, but certainly below hard money commercial) and pay back your family/friend. Then do what you just did again until you've got enough properties. It's a great strategy that we see all the time. Decent credit and a decent property is required, but if those things aren't hurdles (and they don't seem to be from what I've read), that would be a strategy to pursue.
Stephanie
0 Reply
Jeff B.
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
9y
Originally posted by @Domenic Marchetti:

A couple of questions:
1) Are you borrowing $100,000 for the down payment on a property and securing conventional funds for the balance of the purchase price?

Conventional Loans will require that NO PART of the down payment is from borrowed funds and when the find out, they will attest fraud and call the loan.
0 Reply
Domenic Marchetti
West Warwick, RI · Member since 2016 · 16 posts · 11 votes
9y
@Jeff B. - That is what I thought, but I was asking for clarification as that what it sounded like he was doing, which others picked up on and said the same as you.
0 Reply
Nick Zias
OP
Investor · Flushing, NY · Member since 2013 · 32 posts · 3 votes
9y
@Jeff B. Why is that considered fraud?
0 Reply
Michael Le
Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
9y
@Nick Zias, it's fraud because you have to sign documentation stating the money in your bank account that you will use for a down payment is yours. The bank won't lend it to you otherwise for a conventional loan.
0 Reply
Percy N.
Developer · Philadelphia, PA · Member since 2015 · 2k+ posts · 904 votes
9y
JVs and syndications happen all the time. In this case, the members of the LLC are contributing towards a downpayment for a Commercial loan in the name of the LLC. No fraud here. I think people are confusing personal and commercial loan guidelines. Talk to a portfolio lender in your area and go by what they say.
0 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
9y
@Nick Zias to clarify all the post
NO you cannot borrow money from a friend and call that your equity. when you get a loan. you in essence have two loans.. lender won't allow it.
YES you should in this instance create a LLC with the 100K as a Member.. and there capital contribution is 100k.. NOT a Loan to the LLC but true capital.. if they own less than 20% of the LLC usually they don't have to PG. you CAN have uneven distributions in an LLC so no matter what % they own they still have a capital account to cover their cash.. the capital accounts would look like this
1. your friend 100K
2. you 100 dollars..
property is sold it makes 200k first 100k goes to your friend.. next 100 dollars goes to you.. the 99,900 can be split any way you guys agree to in the operating agreement.. this is the luxery of the LLC... you can establish a pref . return plus equity.. only a pref no equity.. what ever you folks agree to.
Podcast Guest on Show #222
JLH Capital Partners51 Review
Website View Page
3 Reply
Jeff B.
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
9y
Originally posted by @Nick Zias:

@Jeff B. Why is that considered fraud?
Because the standard loan application specifies "no borrowed funds".
0 Reply
Filipe Pereira
Property Manager · Windsor Locks, CT · Member since 2016 · 1k+ posts · 1k+ votes
8y
Maybe @Jon F. or @Scott Hollister can point you in the right direction!
0 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.